Amazon.com Inc.
(
AMZN
) is scheduled to report its first quarter fiscal 2012 results on
April 26, 2012. We witness both downward and upward movements in
analyst estimates in the build-up to the release.

The company reported revenues of $17.43 billion, up 60.3%
sequentially and 34.6% year over year (in the middle of
management's guided range but missing Consensus expectations by
around 4.3%). Key strategies for driving revenue growth were
competitive pricing, free shipping, user experience on Amazon
properties and the Amazon Prime program.

The gross margin shrunk 280 bps sequentially to 20.7%, but was
up 34 bps from the year-ago quarter. The sequential decrease was
due to unfavorable mix. The extra costs related to new product
launches also restricted margins.

First Quarter Guidance

Amazon expects revenue to come in at around $12.0-$13.4 billion
(up 27.1% sequentially, and 28.8% year over year at the mid-point),
below Consensus expectations of around $13.4 billion. Operating
income (including $200 million for stock-based compensation and
amortization of intangible assets) is expected to come in at
approximately ($200) to $100 million.

One out of the 29 analysts providing estimates for the first
quarter 2012 decreased the estimate, while one moved in the
opposite direction in the last 30 days. Over the same period, 2
analysts made downward revisions for fiscal 2012.

According to the market research firm NPD Group, video game
software sales were down 28% in the March quarter. As 2-4% of
Amazon's overall business is video games, a few analysts believe
that this presents a modest headwind to Amazon's media business
that likely will not be fully offset by the Kindle and Kindle Fire
sales.

Additionally, the analysts contend that the majority of
customers are adopting the Amazon Prime program that provides free
two-day shipping and also free access to Amazon's streaming media
services, which will increase the shipping losses going
forward.

A few analysts expect gross margins to expand in the first
quarter driven by a favorable mix of business, with strong growth
of 3P and AWS, but expect operating margins to compress due to
higher operating expenses.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate for the first
quarter remained unchanged at 7 cents, but fell 3 cents to $1.36
for fiscal 2012.

Over the past 90-day period, the Zacks Consensus Estimate
witnessed a significant decline of 32 cents for the first quarter
and 55 cents for fiscal 2012.

According to analysts, Amazon remains in an investment cycle
across three primary fronts -- global distribution footprint
(distribution centers), digital initiatives (Kindle, tablet and
video content), and Amazon Web Services (AWS). They believe that
the company's increased spending on fulfillment centers, along with
heavy investments in technology infrastructure to support rapid
growth in AWS and the digital business will lead to continued
margin pressure, impacting profitability. This could be the primary
reason for the expected decrease in estimates.

However, longer term, the analysts believe that effective
utilization of the company's distribution centers and the global
expansion of AWS will lead to an improvement in its
productivity.

Recommendation

Amazon is one of the leading players in an extremely
fast-growing market. We believe Amazon's fourth-quarter momentum
will likely continue in the first quarter given the consistent
growth in the overall eCommerce market.

We believe the mass adoption of lower-priced Kindle and e-reader
devices will lead to decent first quarter revenues. The company's
prime and increased product expansion will continue to boost
revenue per user while facilitating customer retention.

Further, Amazon is expected to benefit from significant growth
potential in domestic and even moreso international e-commerce.
However, the next phase of growth is dependent on Amazon's own
capacity to serve customers, especially in international markets,
where growth rates are likely to be higher. We expect Amazon to
target international growth more aggressively, by starting
operations in new regions around the world.

However, we note that technology investments continue to
pressure operating margins and therefore, margins are anticipated
to be weak in the near term. However, over the long term, we expect
strong results driven by continued share gains and the company's
strong top-line fundamentals.

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